The regulated blockchain infrastructure platform Paxos and State Street Corporation STT launched a partnership on services integrations in May.
As part of a pilot, State Street simulated the settlement and custody of shares on Paxos’ platform and asset movements with Credit Suisse Group AG CS.
At its core, the development validates how blockchains can reduce steps and eliminate frictions in traditional finance. Benzinga spoke with STT’s head of Americas Digital Fund Administration and Tokenization Jay Biancamano to learn more.
The following text was edited for clarity and concision.
Q: Hey Jay, nice to speak with you. Tell me a little bit about yourself.
Jay Biancamano: I’ve been at STT for nearly five years. Prior, I consulted Coin Center, which actually built one of the first exchanges that were subsequently sold to Kraken.
At its core, my background is in building products and services that take technology and change the industry.
I was at Liquidnet and ITG, where we were rolling out new products that either displaced or created new platforms for firms to trade equities and other instruments.
At STT, what do you focus on?
These new technologies — crypto — and how they can change the industry.
In digital assets, everything begins and ends with custody. In the traditional world, that’s not really how it works. It starts with the issuance and everything ends with custody.
So, to compete in the digital world, you have to be a custodian and then expand to other businesses.
STT has nearly $50 trillion in assets under custody. Talk about why it makes sense for an institution of that size to explore digital?
As cool as Bitcoin BTC/USD and Ethereum ETH/USD are, it is a question of whether or not that technology can actually transform the industry.
If you look back into history, we went through the age of de-materialization, from tangible assets into electronic ledgers, allowing us to take products and services and scale them up.
Now, digital takes products and services away from the industry as blockchains — which help in validating ownership and transferring value — democratize and disintermediate.
Over the years I’ve been at STT, we’ve been experimenting and exploring use cases around collateral. We think about taking processes that are inefficient or have a lot of friction and risk, and we look to eliminate them.
When we spoke to Paxos in late 2020, the idea was interesting but STT wasn’t a big equity house like Societe Generale SA SCGLY and Nomura Inc’s NMR Instinet.
So, we asked ourselves: “How can we use this technology to make it more beneficial to the buy-side, and do so in a way that allows us to have a front-to-back strategy?”
After a lot of meetings, we were able to create this platform for clients to actually buy and sell securities using tokenization and do so with T+0 settlement.
Why are tokenization and T+0 relevant?
Beyond cost savings, accelerated settlements minimize risk and error in reconciliation, as well as the friction of having to wait multiple days to receive cash and deliver securities.
Additionally, we can use the same technology to do other things like fractionalization or issuing and settling other asset classes on a blockchain.
Overall, it was important for us to replicate the purchase and sale of equity, do an accelerated settlement, and prove out that blockchain could be pushed to the buy-side.
Why does this do for your clients and the people you do business with?
If I’m able to trade and settle and receive cash almost immediately, I don’t have to take a loan. The broker doesn’t have to provide the cash around that because the owner of the securities has them immediately and now they can move on to their next idea.
This can help with avoiding issues around corporate actions, which require a lot of reconciliation, especially when something happens during a dividend period.
That same model, too, can be applied to fixed income, commodities, private equity and debt, centralized mortgage obligations (CMOs) and homes.
It can take months to settle a house. Half of that’s validating who owns the house. Think about it. Why do we have title searches if everything can be done on a blockchain?
So, you’re crunching the time it takes to move between asset classes. If I’m a manager, and I monetize insurance against equity exposure I have, I don’t have to wait for days to rotate at least some of that payoff into risk. Is this correct?
That’s exactly the way it all works. That opportunity cost is preeminent.
Think about transitions.
If you have a large pension plan and they want to move from one manager to the next, all of the positions between those portfolios are different. They trade and settle disparately.
If everything is tokenized on a blockchain you could do that in minutes, if there is liquidity.
Haven’t you worked with other market participants on these technologies?
Yes. We’ve done a couple of proofs of concept with Symbiont and Vanguard.
We actually looked at CSAs (credit support annexure) — collateral and asset-backed securities — and the issuance of a private placement on a blockchain.
What does it take to make all this more mainstream? How does this go from proof of concept to practice?
I work with four people. The entire team is about 25 to 30 at STT, and we’re looking at these products and services, and thinking about expanding them. We pontificate and work with clients.
Ultimately, though, scalability is the issue and you’re always thinking about how things fit into your legacy systems because STT is a tectonic plate. What we have to do is slowly transition the market and influence the marketplace.
We’re open, though, to having conversations. We have four or five of those meetings a week with different technology providers, but we have a tangible business.
It’s going to be a very interesting three or four next years.
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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